<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
-----------------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_______________to_____________
Commission file number: 000-20985
CALYPTE BIOMEDICAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 06-1226727
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
1440 FOURTH STREET, BERKELEY, CALIFORNIA 94710
(Address of principal executive offices) (Zip Code)
(510) 526-2541
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The registrant had 13,407,943 shares of common stock outstanding as of
April 24, 1998.
================================================================================
<PAGE>
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
FORM 10-Q
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets at
March 31, 1998 (unaudited) and December 31,
1997............................................ 3
Consolidated Condensed Statements of Operations
for the Three Months Ended March 31, 1998 and
1997 (unaudited)................................ 4
Consolidated Condensed Statements of Cash
Flows for the Three Months Ended March 31,
1998 and 1997 (unaudited)....................... 5
Notes to Consolidated Condensed Financial
Statements (unaudited).......................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations... 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................ 18
- 2 -
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
3/31/98 12/31/97
---------------- ---------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents...................................................... $ 7,027 $ 10,820
Securities available for sale.................................................. 1,449 -
Accounts receivable............................................................ 167 133
Inventory...................................................................... 304 161
Notes receivable - officers and employees...................................... 244 239
Notes receivable - related party............................................... 250 -
Other current assets........................................................... 158 150
---------------- ---------------
Total current assets.................................................. 9,599 11,503
Property and equipment, net of accumulated depreciation of $2,951
at March 31, 1998 and $2,824 at December 31, 1997.............................. 1,139 1,219
Other assets ...................................................................... 214 228
---------------- ---------------
$ 10,952 $ 12,950
================ ===============
LIABILITIES, MANDATORILY REDEEMABLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 328 $ 610
Accrued expenses............................................................... 770 912
Capital lease obligations - current portion.................................... 511 479
Deferred revenue............................................................... 500 585
---------------- ----------------
Total current liabilities............................................. 2,109 2,586
Deferred rent obligation............................................................ 36 37
Capital lease obligations - long-term portion....................................... 147 282
---------------- ----------------
Total liabilities..................................................... 2,292 2,905
Mandatorily redeemable Series A preferred stock, $0.001 par value; no shares
authorized, 100,000 shares issued and outstanding; aggregate redemption and
liquidation value of $1,000 plus cumulative dividends.......................... 2,006 1,976
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $0.001 par value; 5,000,000 shares authorized; no shares
issued and outstanding..................................................... - -
Common Stock, $0.001 par value; 20,000,000 shares authorized; 13,407,843 and
13,198,781 shares issued and outstanding as of March 31, 1998 and
December 31, 1997, respectively............................................ 13 13
Additional paid-in capital..................................................... 56,972 56,847
Deferred compensation.......................................................... (430) (496)
Deficit accumulated during development stage................................... (49,901) (48,295)
---------------- ----------------
Total stockholders' equity............................................ 6,654 8,069
================ ================
$ 10,952 $ 12,950
================ ================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
- 3 -
<PAGE>
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Period from
February 18,
1988
(inception)
Three Months Ended March 31, through
------------------------------- March 31,
1998 1997 1998
------------ ------------- ------------
<S> <C> <C> <C>
Revenues:
Product sales................................................ $ 241 $ 15 $ 747
Revenue earned under research and development
contracts, substantially from related parties............. - - 2,390
------------ ------------ -----------
Total revenue.......................................... 241 15 3,137
------------ ------------ -----------
Operating expenses:
Product costs................................................ 489 534 3,879
Research and development..................................... 790 1,158 30,573
Purchased in-process research and development................ - - 2,500
Selling, general and administrative.......................... 685 593 17,262
------------ ------------ -----------
Total expenses......................................... 1,964 2,285 54,214
------------ ------------ -----------
Loss from operations............................ (1,723) (2,270) (51,077)
Interest income, interest expense and other income................ 117 31 235
------------ ------------ -----------
Loss before income taxes and extraordinary item.......... (1,606) (2,239) (50,842)
Income Taxes .................................................... - - (65)
------------ ------------ -----------
Loss before extraordinary item........................... (1,606) (2,239) (50,907)
Extraordinary gain on debt extinguishment......................... - - 485
------------ ------------ -----------
Net loss................................................. (1,606) (2,239) (50,422)
Less dividend on mandatorily redeemable Series A
preferred stock.................................... (30) (30) (1,006)
------------ ------------ -----------
Net loss attributable to common stockholders...................... $ (1,636) $ (2,269) $ (51,428)
============ ============ ===========
Net loss per share attributable to common stockholders............ $ (0.12) $ (0.22)
============ ============
Weighted average shares used to compute net loss per
share attributable to common stockholders.................... 13,379 10,465
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
- 4 -
<PAGE>
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Period from
February 18,
1988
(inception)
Three Months Ended March 31, through
--------------------------------- March 31,
1998 1997 1998
-------------- ---------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................................ $ (1,606) $ (2,239) $ (50,422)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.................................. 127 188 3,378
Loss on sale or disposal of equipment.......................... - - 115
Extraordinary gain on debt extinguishment...................... - - (485)
Amortization of deferred compensation.......................... 116 45 858
Compensation paid by stock issuance............................ - - 47
Forgiveness of note receivable from officer.................... 15 - 105
Purchased in-process research and development costs............ - - 2,500
Changes in operating assets and liabilities:
Accounts receivable.......................................... (34) 21 (167)
Inventory.................................................... (143) 41 (304)
Other current assets......................................... (8) (180) 81
Organizational costs......................................... - - (123)
Other assets................................................. 14 7 (537)
Accounts payable, accrued expenses and deferred
revenue..................................................... (509) (34) 1,500
Deferred rent obligation..................................... (1) (7) 35
Note payable in exchange for expenses paid on
behalf of the Company....................................... - - 192
-------------- ---------------- ---------------
Net cash used in operating activities..................... (2,029) (2,158) (43,227)
-------------- ---------------- ---------------
Cash flows from investing activities:
Proceeds from disposition of equipment.......................... - - 25
Notes receivable from officers and employees.................... (20) - (264)
Loan to related party........................................... (250) - (250)
Purchase of securities available for sale....................... (1,449) - (1,449)
Purchase of equipment, net...................................... (47) (9) (2,389)
Investment in Pepgen Corporation................................ - - (1,000)
-------------- ---------------- ---------------
Net cash used in investing activities..................... (1,766) (9) (5,327)
-------------- ---------------- ---------------
Cash flows from financing activities:
Proceeds from sale of stock..................................... 105 3 59,740
Expenses paid related to sale of stock.......................... - - (3,818)
Prepaid license fee............................................. - - 500
Principal payments on notes payable............................. - - (5,174)
Principal payments on capital lease obligations................. (103) (107) (1,045)
Proceeds from notes payable..................................... - - 3,692
Capital contributions........................................... - - 75
Joint ventures' capital contributions........................... - - 1,611
-------------- ---------------- ---------------
Net cash provided by (used in) financing activities....... 2 (104) 55,581
-------------- ---------------- ---------------
Net (decrease) increase in cash and cash equivalents............... (3,793) (2,271) 7,027
Cash and cash equivalents at beginning of period................... 10,820 7,924 -
-------------- ---------------- ---------------
Cash and cash equivalents at end of period......................... $ 7,027 $ 5,653 $ 7,027
============== ================ ===============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
- 5 -
<PAGE>
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Period from
February 18,
1988
(inception)
Three Months Ended March 31, through
---------------------------------- March 31,
1998 1997 1998
--------------- --------------- ----------
<S> <C> <C> <C>
Supplemental disclosure of cash flow activities:
Cash paid for interest..................................................... $ 37 $ 55 $ 1,085
Cash paid for income taxes................................................. - - 64
Supplemental disclosure of noncash activities:
Acquisition of equipment through obligations under capital leases.......... - - 1,703
Accrued liabilities converted to notes payable............................. - - 363
Accrued liabilities converted to common stock.............................. - - 39
Notes payable converted to common stock.................................... - - 459
Notes payable converted to Series B convertible preferred stock............ - - 50
Notes payable issued upon investment in Pepgen Corporation................. - - 1,000
Options issued upon investment in Pepgen Corporation....................... - - 500
Dividend on mandatorily redeemable Series A preferred stock................ 30 30 1,006
Deferred compensation attributable to stock grants......................... 50 37 1,288
</TABLE>
See accompanying notes to consolidated condensed financial statements.
- 6 -
<PAGE>
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
(UNAUDITED)
(1) THE COMPANY AND BASIS OF PRESENTATION
Calypte Biomedical Corporation (the Company) was incorporated on November 11,
1989 and is a development stage enterprise. The Company's primary activities
have been to obtain funding, perform research and development and obtain
approval for its urine-based diagnostic tests.
The accompanying unaudited consolidated condensed financial statements have been
prepared by the Company, pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC), and reflect all adjustments (consisting of normal
recurring adjustments) which, in the opinion of management, are necessary for a
fair presentation of the Company's financial position as of March 31, 1998 and
the results of its operations and its cash flows for the three months ended
March 31, 1998 and 1997. Interim results are not necessarily indicative of the
results to be expected for the full year. This information should be read in
conjunction with the Company's audited consolidated financial statements for
each of the years in the three year period ended December 31, 1997 included in
Form 10-K filed with the SEC on March 25, 1998.
Certain information in footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
has been condensed or omitted pursuant to the rules and regulations of the SEC.
The data disclosed in these notes to consolidated financial statements for these
periods is unaudited.
(2) SIGNIFICANT ACCOUNTING POLICIES
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
Net loss per share attributed to common stockholders has been computed using the
weighted average number of common shares outstanding during each period
presented. In 1997, the company adopted the provisions of Statement of
Financial Accounting Standard No. 128, Earnings Per Share (SFAS No. 128). SFAS
No. 128 requires companies with complex capital structures to present basic
earnings per share (EPS) and diluted EPS, instead of the primary and fully
diluted EPS previously required. The new standard requires additional
informational disclosures, and also makes certain modifications to the currently
applicable EPS calculation defined in Accounting Principles Board No. 15. All
net loss per share amounts have been retroactively restated to reflect adoption
of this statement.
- 7 -
<PAGE>
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
(UNAUDITED)
(3) INVENTORIES
Inventories are stated at the lower of cost or market and the cost is determined
using the first-in, first-out method. Inventory as of March 31, 1998 and
December 31, 1997 consisted of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
3/31/98 12/31/97
(in thousands) (in thousands)
-------------- --------------
Raw Materials $ 67 $ 53
Work-in-Process 237 103
Finished Goods - 5
-------- ---------
Total Inventory $ 304 $ 161
======== =========
</TABLE>
(4) NOTE RECEIVABLE - RELATED PARTY
During January 1998, the Company loaned Pepgen Corporation, a related party of
the Company, $250,000 at an effective interest rate of 10% which was due on
March 31, 1998. The due date of the loan has been extended to May 15, 1998.
- 8 -
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" that relate to future plans, events or performance
are forward-looking statements which involve risks and uncertainties. Actual
results, events or performance may differ materially from those anticipated in
these forward-looking statements as a result of a variety of factors, including
those set forth under "Factors That May Affect Future Results, Events or
Performance" below. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements that may be needed to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
OVERVIEW
- --------
Since commencement of operations in 1988, Calypte Biomedical Corporation (the
Company or Calypte) has reported its results as a development stage company,
engaged in research, development and commercialization of its products. The
Company's efforts have been primarily focused on developing and obtaining
approval for its urine-based diagnostic tests for sexually transmitted diseases.
In August 1996, the Company received a product license and an establishment
license from the U.S. Food and Drug Administration (FDA) to manufacture and sell
in interstate and foreign commerce the Company's urine-based HIV-1 screening
test for use in professional laboratory settings. In October 1996, Calypte
received notification that the FDA would require additional data before it would
approve an amendment to Cambridge Biotech Corporation's product license
application for its HIV-1 western blot kit to allow use of the western blot kit
as a confirmatory test with Calypte's HIV-1 urine screening assay. On March 17,
1997, the Company submitted to the FDA the additional data requested by the FDA
in connection with such requested amendment to Cambridge Biotech Corporation's
product license application. In September 1997, Cambridge Biotech Corporation
received official notice from the FDA that the agency had completed its review
of the application for the HIV-1 western blot kit and that the application is
approvable pending the completion of product labeling. There can be no assurance
that Calypte will have significant revenues from sales of the HIV-1 urine
screening assay or the confirmatory test, if approved.
The Company has a limited history of operations and has experienced significant
operating losses since inception. As of March 31, 1998, the Company had an
accumulated deficit of $49.9 million. The Company expects operating losses to
continue as it initiates marketing and sales activities and additional research
and development. The Company's marketing strategy is to use distributors and
focused direct selling and marketing partners to penetrate certain targeted
domestic markets. The Company plans to maintain a small direct sales force to
market the Company's urine-based HIV-1 test to major laboratories serving the
life insurance, military, immigration and criminal justice markets. Other U.S.
and international markets will be targeted utilizing diagnostic product
distributors. The Company does not have experience in manufacturing, marketing
or selling its products in commercial quantities. There can be no assurance that
the Company's products will be successfully commercialized or that the Company
will achieve significant product revenues. In addition, there can be no
assurance that the Company will achieve or sustain profitability in the future.
- 9 -
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
The following represents selected financial data:
<TABLE>
<CAPTION>
----------------------------------
Three Months Ended
March 31,
----------------------------------
1998 1997
---------------- -------------
(in thousands)
----------------------------------
<S> <C> <C>
Total revenue $ 241 $ 15
-------------- -------------
Operating expenses:
Product costs 489 534
Research and development 790 1,158
Selling, general and administrative 685 593
-------------- -------------
Total expenses 1,964 2,285
-------------- -------------
Loss from operations (1,723) (2,270)
Interest income, interest expense
and other income 117 31
-------------- -------------
Loss before income taxes $ (1,606) $ (2,239)
=============== =============
</TABLE>
Three Months Ended March 31, 1998 and 1997
- ------------------------------------------
In the first quarter of 1998, revenue from Calypte's HIV-1 screening test
increased $226,000 to $241,000 from $15,000 in the prior year's comparable
period. Product sold to date relates to sales made primarily to laboratories for
research and evaluation purposes. Sales in the first quarter of 1998 increased
from the same period in 1997 due to the Company receiving more orders from these
customers. The Company does not anticipate commencing significant sales for
commercial uses until FDA approval for the confirmatory test for Calypte's HIV-1
urine screening test is received.
Product costs decreased 8% to $489,000 for the three months ended March 31, 1998
from $534,000 for the three months ended March 31, 1997. Product costs during
the three months ended March 31, 1997 were higher because a greater quantity of
product produced was expensed since it was not retained as saleable inventory.
During the three months ended March 31, 1998, a greater quantity of product was
valued as inventory (work-in-process) in anticipation of FDA approval of the
confirmatory test for Calypte's HIV-1 urine screening test.
Research and development expenses decreased 32% to $790,000 for the three months
ended March 31, 1998 from $1.2 million in the corresponding period of the prior
year. The decrease was principally due to clinical investigations performed in
the first quarter of 1997 for the additional data requested by the FDA in
October, 1996 and the reduction in the use of regulatory consultants.
Selling, general and administrative expenses increased $92,000 or 16% to
$685,000 for the three months ended March 31, 1998. The increase was primarily
related to the increase in the use of consultants related to various projects.
Interest income, interest expense and other income increased $86,000 to $117,000
for the three months ended March 31, 1998 from $31,000 for the three months
ended March 31, 1997. The increase was primarily due to the interest earned from
Private Placement proceeds and the decrease in interest paid for capital leases.
- 10 -
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Financing Activities
- --------------------
The Company has financed operations from inception primarily through the private
placement of preferred stock and common stock, the Company's Initial Public
Offering (IPO) of common stock and, to a lesser extent, from payments related to
research and development agreements, a bank line of credit, equipment lease
financings and borrowings from notes payable. Since inception through March 31,
1998, the Company has received approximately $44.3 million in net proceeds from
private placements of the Company's equity securities and $13.2 million in net
proceeds in its IPO. In addition, approximately $1.7 million was borrowed by the
Company through equipment lease financings, of which approximately $658,000 was
outstanding as of March 31, 1998 and $2.4 million was received from research and
development agreements.
During 1996, the Company completed its IPO of 2,536,259 shares of its Common
Stock at $6.00 per share. After deducting underwriters' discounts and
commissions and additional expenses associated with the IPO, the Company
received net proceeds of $13.2 million.
In October 1997, the Company completed a private placement of 2,600,999 shares
of its common stock at $4.25 per share. The Company received net proceeds of
approximately $10.2 million after deducting placement agent commissions and
additional expenses associated with the private placement.
Although the Company believes current cash will be sufficient to meet the
Company's operating expenses and capital requirements through December 31, 1998,
the Company's future liquidity and capital requirements will depend on a number
of factors, including regulatory actions by the FDA and other international
regulatory bodies, market acceptance of its products, and intellectual property
protection.
There can be no assurance that the Company's products will be successfully
commercialized or that the Company will achieve significant product revenue. In
addition, there can be no assurance that the Company will achieve or sustain
profitability in the future. There can be no assurance that the Company will not
be required to raise additional capital or that such capital will be available
on acceptable terms, if at all.
Operating Activities
- ---------------------
For the three months ended March 31, 1998 and March 31, 1997, the Company's cash
used in operations was $2.0 million and $2.2 million, respectively. The cash
used in operations was primarily to fund research and development expenses as
well as manufacturing expenses related to the urine-based HIV-1 test along with
selling, general and administrative expenses of the Company.
FACTORS THAT MAY AFFECT FUTURE RESULTS, EVENTS OR PERFORMANCE
- -------------------------------------------------------------
The Company wishes to caution readers that the following important factors,
among others, may affect the Company's future results, events or performance and
could cause actual results, events or performance to differ materially from
those expressed in any forward-looking statements made by the Company in this
report or presented elsewhere by the Company from time to time.
- 11 -
<PAGE>
Dependence on Regulatory Approval of Confirmatory Test
- ------------------------------------------------------
In order to minimize the possibility of false positive reports, positive HIV
screening results must be confirmed with an additional test format before being
reported to the physician or patient in the United States and in most developed
countries. The Company has entered into an agreement with Cambridge Biotech
Corporation (Cambridge Biotech) under which both the Company and Cambridge
Biotech will market and distribute a urine-capable western blot confirmatory
test which uses technology licensed from the Company. The western blot kit
manufactured by Cambridge Biotech has already received FDA approval for blood
testing, and is the only confirmatory test for which application has been made
for FDA approval for use with urine. On September 18, 1997, Cambridge Biotech
received official notice from the FDA that the FDA had completed its review of
the HIV-1 western blot kit. Such notice indicated that Cambridge Biotech's
application was approvable pending the completion of product labeling. There can
be no assurance that the FDA will grant approval of the Cambridge Biotech urine
confirmatory test. Any significant delay in obtaining approval for the Cambridge
Biotech urine confirmatory test or the failure to obtain such approval at all
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Reliance on Proprietary Technology and Know-How; License Obligations
- --------------------------------------------------------------------
The Company believes that its future success will depend in large part on its
ability to protect its patents and proprietary rights. Accordingly, the
Company's ability to compete effectively will depend in part on its ability to
develop and maintain proprietary aspects of its technology. In addition, the
Company currently has the right to utilize certain patents and proprietary
rights under licensing agreements with New York University, Cambridge Biotech,
Repligen, and Texas A&M University System. These license arrangements secure
intellectual property rights for the manufacture and sale of the Company's
products. There can be no assurance that such intellectual property rights will
be sufficient or that such patents and proprietary rights can be adequately
protected.
Uncertainty of Market Acceptance; Lack of Sales and Marketing Experience
- ------------------------------------------------------------------------
The Company's products represent a new method of determining the presence of HIV
antibodies and there can be no assurance that these products will gain any
significant degree of market acceptance among physicians, patients or health
care payors, even if necessary international and U.S. regulatory and
reimbursement approvals are obtained. The Company believes that recommendations
and endorsements by the medical community will be essential for market
acceptance of the products and there can be no assurance that any such
recommendations or endorsements will be obtained. The Company has no experience
marketing and selling its products either directly or through its distributors.
The Company's marketing strategy relies upon its alliance with third-party
distributors for the success of its products. There can be no assurance that the
Company's direct sales force will be effective, that its distributors will
market successfully the Company's products or that, if such relationships are
terminated, the Company will be able to establish relationships with other
distributors on satisfactory terms, if at all. Any disruption in the Company's
distribution, sales or marketing network, or failure of the Company's products
to achieve market acceptance, could have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence on a Single Product
- ------------------------------
The Company's HIV-1 urine-based screening test is the Company's only
FDA-approved product. Because the screening test is the Company's sole product,
the Company could be required to cease operations if Cambridge Biotech's
confirmatory test does not receive FDA approval or if the Company's test,
together with the Cambridge Biotech urine confirmatory test, fail to achieve
market acceptance or generate significant revenue.
- 12 -
<PAGE>
Dependence Upon Sole Source Suppliers
- -------------------------------------
The Company purchases raw materials and components used in the manufacture of
its product from various suppliers and relies on single sources for several of
these components. Establishment of additional or replacement suppliers for these
components cannot be accomplished quickly. The Company has a number of
single-source components and any delay or interruption in supply of these
components could significantly impair the Company's ability to manufacture its
products in sufficient quantities, and therefore would have a material adverse
effect on the Company's business, financial condition and results of operations,
particularly as the Company scales up its manufacturing activities in support of
commercial sales.
Limited Manufacturing Experience; Scale-Up Risk
- -----------------------------------------------
The Company has limited experience in manufacturing its products. The Company
currently manufactures its products in limited quantities for submission to the
FDA for ongoing compliance, international clinical trials and building its
inventory in anticipation of commercialization. The Company does not have
experience in manufacturing its products in commercial quantities. Manufacturers
often encounter difficulties in scaling-up production of new products, including
problems involving production yields, quality control and assurance, raw
material supply and shortages of qualified personnel. The implementation of
manufacturing at the larger Alameda facility will be needed if initial demand
exceeds the more limited capacity of the Berkeley facility. Difficulties
encountered by the Company in manufacturing scale-up to meet demand, including
delays in receiving FDA approval for the Alameda facility, could have a material
adverse effect on its business, financial condition and results of operations.
Dependence Upon International Distributors and Sales
- ----------------------------------------------------
The Company anticipates that a significant portion of its revenues for the next
several years will be derived from international distributor sales.
International sales and operations involve a number of inherent risks and may be
limited or disrupted by the imposition of government controls, export license
requirements, political instability, trade restrictions, changes in tariffs,
difficulties in managing international operations and fluctuations in foreign
currency exchange rates. Certain of the Company's distributors have limited
international marketing experience, and there can be no assurance that the
Company's distributors will be able to market successfully the Company's
products in any international market.
Intense Competition in Company's Markets and Rapid Technological Advances by
- ----------------------------------------------------------------------------
Competitors
- -----------
Competition in the in vitro diagnostic market is intense and is expected to
increase. Within the United States, the Company will face competition from a
number of well-established manufacturers of blood-based enzyme immunoassays,
plus at least one system for the detection of HIV antibodies using oral fluid
samples. In addition, the Company may face intense competition from competitors
with significantly greater financial, marketing and distribution resources than
the Company, several of whom may have already submitted applications to the FDA
for approval of their over-the-counter (OTC) products. There can be no assurance
that the Company's competitors will not succeed in developing or marketing
technologies and products that are more effective than those developed by the
Company or that would render the Company's technologies or products obsolete or
otherwise commercially unattractive. In addition, there can be no assurance that
competitors will not succeed in obtaining regulatory approval for such products,
or introducing or commercializing them prior to the Company. Such developments
could have a material adverse effect on the Company's business, financial
condition and results of operations.
- 13 -
<PAGE>
Potential Fluctuations in Quarterly Results
- -------------------------------------------
The Company expects that its revenues and results of operations may fluctuate
significantly from quarter to quarter and will depend on a number of factors,
many of which are outside the Company's control. These factors include actions
relating to regulatory matters, the extent to which the Company's products gain
market acceptance, the timing and size of distributor purchases, introduction of
alternative means for testing for HIV, competition, the timing and cost of new
product introductions and general economic conditions.
Extensive Government Regulation
- -------------------------------
The Company's products are subject to extensive regulation by the FDA and, to
varying degrees, by state and foreign regulatory agencies. The Company's
products are regulated by the FDA under the Federal Food, Drug and Cosmetic Act
(the Act), as amended by the Medical Device Amendments of 1976 and the Safe
Medical Devices Act of 1990, among other laws. Under the Act, the FDA regulates
the preclinical and clinical testing, manufacturing, labeling, distribution,
sale and promotion of medical devices in the United States. The FDA prohibits a
device, whether or not cleared under a 510(k) premarket notification or approved
under a pre-market application, from being marketed for unapproved clinical
uses. If the FDA believes that a company is not in compliance with the
regulations, it can institute proceedings to detain or seize a product, issue a
recall, prohibit marketing and sales of the such company's products and assess
civil and criminal penalties against such company, its officers and/or its
employees. Furthermore, the Company plans to sell products in certain foreign
countries which impose local regulatory requirements. The preparation of
required applications and subsequent FDA and foreign regulatory approval process
is expensive, lengthy and uncertain. Failure to comply with the FDA and similar
foreign requirements could result in civil monetary penalties or criminal
sanctions, restrictions on or injunctions against marketing of the Company's
products. Additional enforcement actions potentially may include seizure or
recall of the Company's products and other regulatory action. There can be no
assurance that the Company will be able to obtain necessary regulatory approvals
or clearances in a timely manner or at all, and delays in receipt of or failure
to receive such approvals or clearances, loss of previously received approvals
or clearances, or failure to comply with existing or future regulatory
requirements would have a material adverse effect on the Company's business,
financial condition and results of operations.
Establishment and Regulation of Reference Laboratory
- ----------------------------------------------------
The Company intends to establish a clinical reference laboratory in connection
with seeking approval for an OTC home urine collection kit for HIV-1. There are
a number of risks in establishing a reference laboratory especially for testing
for HIV. The Company must, among other actions, seek to hire and retain key
laboratory personnel, purchase necessary equipment, secure required permits,
incur marketing expenses, obtain customers and comply with government
regulations. The Company's planned laboratory would test for HIV using the
Company's urine-based HIV-1 test and, if approvals are obtained, receive home
collected urine for HIV testing. The Company may be required to offer counseling
in connection with the reporting of results to laboratory customers. There can
be no assurance that the Company can establish or receive the necessary approval
for the laboratory.
Product Liability and Recall Risk; Limited Insurance Coverage
- -------------------------------------------------------------
The manufacture and sale of medical diagnostic products entail the risk of
product liability claims or product recalls. While the Company maintains
$5,000,000 of product liability insurance, the Company faces the risk of
litigation in the event of false positive or false negative reports. There can
be no assurance that the Company's existing insurance coverage limits will be
adequate to protect the Company from any liabilities it might incur in
connection with the clinical trials or sales of its products. In addition, the
Company may require increased product liability coverage as its products are
commercialized. Such insurance is expensive
- 14 -
<PAGE>
and in the future may not be available on acceptable terms, if at all. A
successful product liability claim or series of claims brought against the
Company in excess of its insurance coverage, or a recall of the Company's
products, could have a material adverse effect on the Company's business,
financial condition and results of operations.
History of Operating Losses; Need for Additional Financing
- ----------------------------------------------------------
The Company has incurred losses in each year since its inception and has an
accumulated deficit of approximately $49.9 million through March 31, 1998,
including a net loss of $1.6 million for the quarter ended March 31, 1998. The
Company does not expect that revenues from product sales or other sources will
be sufficient to fund operations or that the Company will achieve profitability
or positive cash flow prior to raising additional financing. Additional
financing will be required to fund the Company's continuing operations and
product and business development activities in the form of debt or equity
securities or bank financing. There can be no assurance that such financing will
be available on acceptable terms, if at all. The unavailability of such
financing could delay or prevent the development, testing, regulatory approval,
manufacturing or marketing of some or all of the Company's products and could
have a material adverse effect on the Company's business, financial condition or
results of operations.
Hazardous Materials
- -------------------
As with many diagnostic companies, the Company's research and development
involves the controlled use of hazardous materials. There can be no assurance
that the Company's safety procedures for handling and disposing of such
materials will comply with the standards prescribed by federal, state and local
regulations or that it will not be subject to the risk or accidental
contamination or injury from these materials. In the event of such an accident,
the Company could be held liable for any damages that result and any such
liability could materially adversely affect the Company's business, financial
condition and results of operations.
Dependence Upon Key Personnel
- -----------------------------
The Company is dependent upon a number of key management and technical
personnel. The Company's ability to manage its transition to commercial-scale
operations, and hence its success, will depend on the efforts of these
individuals, among others. The loss of the services of one or more key employees
could have a material adverse effect on the Company. The Company's success will
also depend on its ability to attract and retain additional highly qualified
management and technical personnel. The Company faces intense competition for
qualified personnel, many of whom are often subject to competing employment
offers, and there can be no assurance that the Company will be able to attract
and retain such personnel.
Possible Volatility of Stock Price
- ----------------------------------
There can be no assurance than an active trading market will be maintained in
the Company's Common Stock. The Company's Common Stock is listed on the NASDAQ
SmallCap Market System. The stock market has from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock. In addition,
the market price of the shares of Common Stock is likely to be highly volatile.
Factors such as fluctuations in the Company's operating results, announcements
of technological innovations or new products by the Company or its competitors,
FDA and international regulatory actions, actions with respect to reimbursement
matters, developments with respect to patents or proprietary rights, public
concern as to the safety of products developed by the Company or others,
- 15 -
<PAGE>
changes in health care policy in the United States and internationally, changes
in stock market analysts' recommendations regarding the Company, other medical
products companies or the medical product industry generally and general market
conditions may have a significant effect on the market price of the Common
Stock.
Potential Adverse Effect on Market Price of Shares Eligible for Future Sale
- ---------------------------------------------------------------------------
Substantially all of the shares of the Company's outstanding Common Stock are
freely tradeable. Sales of Common Stock (including shares issued upon the
exercise of outstanding options) in the public market could materially adversely
affect the market price of the Common Stock. Such sales also might make it more
difficult for the Company to sell equity securities or equity-related securities
in the future at a time and price that the Company deems appropriate.
Anti-Takeover Effect of Certain Charter Provisions
- --------------------------------------------------
Certain provisions of the Company's Certificate of Incorporation and Bylaws
could discourage potential acquisition proposals and could delay or prevent a
change in control of the Company. Such provisions could diminish the
opportunities for a stockholder to participate in tender offers, including
tender offers at a price above the then current market value of the Common
Stock. Such provisions may also inhibit increases in the market price of the
Common Stock that could result from takeover attempts. In addition, the Board of
Directors of the Company, without further stockholder approval, may issue
Preferred Stock with such terms as the Board of Directors may determine, that
could have the effect of delaying or preventing a change in control of the
Company. The issuance of Preferred Stock could also adversely affect the voting
power of the holders of Common Stock, including the loss of voting control to
others.
Limited Public Market; Possible Removal from Nasdaq SmallCap
- ------------------------------------------------------------
The public trading volume of the Company's Common Stock has been relatively
limited. There can be no assurance that a more active trading market for the
Company's Common Stock will develop or, if it develops, that it will be
sustained. In addition, in the past year the Nasdaq Stock Market has made
inquiries of the Company regarding whether the Company continues to meet the
maintenance criteria for trading on the Nasdaq SmallCap market. While the
Company currently meets the maintenance criteria, the Company's ability to
continue to do so will depend on whether the Company becomes profitable or is
able to raise additional financing. If the Company were to fail to meet the
maintenance criteria and be removed from the Nasdaq SmallCap market, the public
trading volume and the ability of stockholders to sell their shares could be
significantly impaired.
Year 2000
- ---------
The Company is reviewing its internal computer system to ensure these systems
are adequately able to address the issues expected to arise in connection with
the upcoming Year 2000. If necessary, the Company expects to implement the
systems necessary to address Year 2000 issues and is reviewing the cost of such
actions, if any. The Company expect such modifications to its internal systems,
if necessary, will be made on a timely basis, and presently believes that, with
modifications to existing software or converting to new software, if necessary,
the Year 2000 problem will not pose significant operational problems for the
Company's computer systems or other operations; however, there can be no
assurance there will not be a delay in, or increased costs associated with, the
implementation of such changes, if necessary, and the Company's inability to
implement such changes could have an adverse effect on future results of
operations.
- 16 -
<PAGE>
The Company has not fully determined the extent to which the Company may be
impacted by third parties' systems, which may not be Year 2000 compliant. The
Year 2000 computer issue may create risk for the Company from third parties with
whom the Company deals. There can be no assurance that the systems of other
companies which the Company deals with will be timely converted, or that any
such failure to convert by another company could not have an adverse effect on
the Company.
- 17 -
<PAGE>
PART II. OTHER INFORMATION
---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K - None
- 18 -
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CALYPTE BIOMEDICAL CORPORATION
------------------------------
(Registrant)
Date: May 11, 1998 By: /s/ John J. DiPietro
-----------------------
John J. DiPietro
Chief Operating Officer, Vice President
- Finance,
Chief Financial Officer and Secretary
(Principal Accounting Officer)
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